This post is written by John from ESI Money.
The Pros of Being a Landlord
A while ago Barbara wrote a post titled Being a Landlord Sucks — Why You Shouldn’t Invest in Real Estate.
It was an interesting title that showed up in my feed reader. Since I’m a big fan of real estate investing, I clicked through, read the piece, and left this comment:
I hear you, real estate is not for everyone.
On the plus side, RE was the main reason I retired at 52. It’s managed by a company for me, so I have very few hassles with it (I actually live over 1,000 miles away from my properties.)
Barbara saw the comment and sent me a note asking if I’d expand on my thoughts and write about the pros of being a landlord. I said I’d love to and will tell you why you should consider investing in real estate.
The Downsides of Real Estate
Let’s begin by addressing Barbara’s concerns. Her objections to real estate investing basically boil down to this:
Lots of time and hassles.
She listed 26 steps to buying and managing real estate.
There’s also the hassle of bad tenants, 3 am toilet repairs, and all the rest. The end of her post also talked about a better alternative for investing in real estate – REITs or real estate investment trusts.
Let me begin by saying that there is a time investment required in real estate investing. That’s for sure. There are also bad tenants and 3 am calls.
But there are also steps that can be taken to minimize these issues, and that’s why I’m sold on the real estate investing advantages. Given the upside, I think real estate investing is good way to make money. I think it’s especially great since it allowed me to take early retirement and not spend a penny of my savings.
How Real Estate Allowed Me to Retire at 52
Before we get into why I like real estate, let’s take a quick look at my background for perspective:
- I bought my three places (14 total units) in 2010, shortly after the housing collapse.
- I paid with cash. This allowed me to negotiate lower prices plus beat out other potential buyers who needed to get financing.
- I hired a contractor and as units came up for renewal, we remodeled them, making them much nicer.
- As a result of the investment in the units, we raised rents.
- Shortly after I bought my second place, I turned day-to-day operations over to professional managers.
- I net approximately 10% a year and my places have appreciated 45% to boot.
- I now live 1,000 miles away from the properties.
- I spend about two hours a month managing them (simply looking over monthly income and expense reports) and they account for 70% of my retirement income.
The worst thing I did: didn’t buy enough. I had a firm 10% return guideline. If I had relaxed a bit to just 9% I would have had twice the number of places and currently be making a fortune.
Why You Should Invest in Real Estate
Let’s get to the nitty gritty now. Here’s my list of the advantages of investing in real estate:
- Great returns — How would you like to make 10% on your money plus appreciation? Yes, it can be done. Here’s a list of my financial results as well as details on the appreciation my places have had since I bought them. Yes, it’s true that I purchased near the bottom of the housing collapse (which helps with the appreciation), but I’m looking at deals these days which still get me 7% return.
- Good source of income near retirement — If you want to retire, you’re going to have to either live off earnings from your savings, withdraw from savings, or find some other source of income. With the first two, you’re limited to 4% at most which means you’re going to have to save a boatload of money. This means you’ll probably have to work longer. Since real estate has higher returns, the amount you need to invest is lower so there are fewer years until retirement. So which sounds more appealing to you: $1 million at 4% withdrawal/return ($40k) or $400k at 10% return ($40k)? Both earn you the same amount but one is going to take over twice as long to reach.
- Don’t have to spend a fortune — I bought my places in a mid-sized Midwest town. They cost me a bit under $600k for 14 total units and produce $60k or so of income a year. You don’t need to spend $2 million in NYC to get the income you need.
- Pretty good business with low hours — Let’s say you owned a business that made $60k per year. How many hours do you think you’d have to work a week? It would be a ton. As I said, I spend about two to three hours max a month on my real estate investments. If we figured my hourly earnings over the life of my properties, it’s probably astronomical.
- Headaches can be minimized — This is the key that gets past Barbara’s objections: use professional real estate managers. I got mine shortly after I bought my second property and they have been awesome. Yes, they cost 8% of my rents. But they allow me total freedom and almost no time commitment. They also handle all those pesky early morning emergency calls and deal with bad tenants. It’s money well spent. There’s no way I could own my places and live half a country away without them.
- It’s a creative outlet — For someone who likes business and being creative, real estate is awesome. You get to make financial decisions and then design a living space based on your vision. With my places, we bought units that needed a bit of TLC, invested $10k in each, and went to work. They turned out stunning. Rents increased a couple hundred dollars a month per unit too. It was a fun process.
- Does require upfront time, but it’s fun — The largest time investment for me was actually finding the right places. But this is enjoyable too. I like looking at various homes and apartment units, imagining what they can become, and evaluating the possible financials. If you don’t enjoy this sort of thing, it can be a hassle. But if you do, it’s a blast.
Click here to find out: Are You Cut Out to Buy a Fixer-Upper? >>>
I’d be remiss if I didn’t offer one piece of advice that can make all of these go much smoother: find a real estate mentor. When I finally found mine, I knew I was ready to buy. His advice and guidance through the process was invaluable.
As I said in my comment on the original post, real estate investing isn’t for everyone. So if the points above turn you off, that’s fine. There are other ways to grow your net worth and retire early.
But if you want/need a solid source of income with good returns and you enjoy running your own mini-business, real estate investing just may be for you.
ESI Money is a blog about achieving financial independence through earning, saving, and investing (ESI). It’s written by John, an early 50’s retiree who achieved financial independence, shares what’s worked for him, and details how others can implement those successes in their lives. You can get his free ebook Three Steps to Financial Independence here.